Demand and Supply in the Economy
Demand and supply are two of the most important fundamental concepts in microeconomics that one needs to know about. Now, if asked which among them is more important to the economy, then the answer is both. Demand and supply are both equally important to any economy. Demand is the representation of the desire of a consumer to purchase goods and services and therefore it acts as a metric of measurement when it comes to the willingness of a consumer to pay a price for a particular good or service. Supply happens to be the total amount of a specific good or service that is available at a given time to all the consumers.
These are the two major economic forces that influence each other and that is why both demand and supply are equally important for the economy. Within an economy, these forces impact the prices of all consumer goods and services.
Price Elasticity on Demand and Supply
An increase in demand is always led by the fact that consumers may exhaust the available supply of a good or service by purchasing it at high volumes. Now as demand increases, simultaneously the available supply happens to decrease as well. Also, keep in mind that while an increased supply may be able to satiate the available demand at a particular price point, prices may fall if supply happens to grow continually. On the flip side, if supply tends to decrease then prices may increase. This shows that both have an important functional relationship because they together always determine the prices of almost all goods and services in an economy.
Market Economy
The principles of a market economy dictate that this very functional relationship between the forces of supply and demand happens to balance out at a point in the future. This future point at which supply is completely equal to demand is known as the equilibrium price. At this particular point, prices always seem to be perfectly set to interest consumers to purchase goods. At the same time, it also ensures that all organizations or companies produce neither too much nor too little. Economists and companies always tend to analyze the relationship between supply and demand when they want to make strategic decisions regarding products. The market economy always assumes that both are undoubtedly the best determinants for the growth and health of an economy.
Consumer Behavior
Consumer behavior also dictates which products are produced and sold because consumers are the ones who always create the demand that companies attempt to meet. As a result, companies often tend to study consumer behavior because they want to understand the current demand and then subsequently predict future demand as well. It is vital that all organizations and companies always maintain enough capacity to produce enough of a good or service. They can lead to the satisfaction of consumer demands.
This brings us to the end of our discussion on which is more important to the economy. Now, let us know your thoughts on the topic.
